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CHINA faces growing pressure to increase the value of the yuan -
and US Treasury Secretary Henry Paulson has nothing to do with
it.

The world's fastest-growing economy is so hot that the Chinese
Government is considering a currency revaluation prompted by
uncontrollable money supply growth, inflation, a runaway stock
market and ballooning foreign exchange reserves.

Mr Paulson, whose mandate as Treasury Secretary amounts to pleas
for a stronger yuan, will be only too happy to give credit for the
Chinese policy shift to the laws of economics.

The People's Bank of China moved last week to allow its currency
to trade in a wider range, raising interest rates and curbing bank
lending just ahead of a meeting between Vice Premier Wu Yi and Mr
Paulson in Washington.

"This is a modest and methodical act and very much in keeping
with China's own interest," said Charlene Barshefsky, the chief US
trade negotiator from 1997 to 2001 and now a senior international
partner at the law firm WilmerHale in Washington. "It needs greater
control over its economy and it needs to do that now."

The central bank said the yuan would be allowed to move as much
as 0.5 percentage points on either side of the daily rate it sets
against the dollar, up from the current 0.3 points.

The Government also raised its one-year benchmark lending rate
for the fourth time since April, to 6.57 per cent, and boosted bank
reserve requirements for the eighth time, by half a percentage
point to 11.5 per cent.

The changes did little to ease concerns about China's failure to
slow an economy that grew 11.1 per cent in the first quarter,
fuelled by exports that are so cheap that foreign exchange reserves
are growing at a rate of $US1 million ($1.2 million) a minute.

"Some slowing of export growth is probably now becoming
desirable because they need to find a more effective weapon to slow
the economy down," said Jim O'Neill, head of global economic
research at Goldman Sachs Group in London. "I suspect it will mean
greater currency flexibility and an accelerated pace of
appreciation."

The yuan rose 0.1 per cent last week to 7.6686 to the US dollar
and has gained 7.9 per cent since July 2005, when the central bank
ended a decade of fixed exchange rates. The currency was little
changed at 7.6625 yesterday.

Goldman Sachs and Merrill Lynch say the yuan will gain 9.6 per
cent to about 7 per US dollar within 13 months. That would be
triple the current pace of appreciation and the most in more than a
quarter century. A 10 per cent gain next year would be "feasible"
without threatening the economy, Ms Barshefsky said.

Cash is flooding into the economy. Foreign exchange reserves
rose by a record $US136 billion in the first quarter to $US1.2
trillion, the most in the world, the central bank said.

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